We construct a novel risk-based similarity peer network by applying machine learning techniques to extract a comprehensive set of disclosed risk factors from firms' annual reports. We find that a firm's future returns can be significantly predicted by the past returns of its risk-similar peers, even after excluding firms within the same industry. A long-short portfolio, formed based on the returns of these risk-similar peers, generates an alpha of 84 basis points per month. This return predictability is particularly pronounced for negative-return stocks and those with limited investor attention, suggesting that the effect is driven by slow information diffusion across firms with similar risk exposures. Our findings highlight that the risk factors disclosed in 10-K filings contain valuable information that is often overlooked by investors.

From the perspective of corporate labor employment, we examine whether debt pressure on local governments prompts them to shift part of their social responsibilities to local firms. We conduct an analysis on Chinese local government debt (LGD) data and find that when LGD is higher, local firms are less likely to cut labor costs when their sales decrease, indicating greater labor cost stickiness. We attribute this to the responsibility-shifting effect, i.e., with heavier debt burdens, local governments intervene more in corporate labor decisions by restricting employee layoffs. Consistent with this argument, we find that the effect of LGD on labor cost stickiness is more pronounced for state-owned and politically connected firms; in regions with lower marketization levels and government fiscal self-sufficient capacities; and when regional unemployment rates, macroeconomic uncertainty, and political risk are higher. We show that through responsibilityshiftingamid high LGD, local governments benefit from a reduction in social expenditures. However, firms with stickier current labor costs will have lower subsequent productivity and market value, despite local governments reciprocating with more subsidies. Overall, LGD not only adversely impacts firm financing through the crowding-out effect but also erodes firm value through the responsibility-shifting effect.

The voluminous strategy research on the determinants of corporate scope is often premised on a well-established property rights regime, which contrasts with the weak property rights protection that still characterizes most countries today. We address this gap by applying property rights theory to theorize and empirically examine how the strengthening of the property rights regime affects corporate scope. Our analysis exploits the enactment of a property law that enhanced the formal protection of private properties in China as a quasi-experiment. We show that with a strengthened property rights regime, the horizontal relatedness among private firms’ businesses increases, but their vertical relatedness decreases, compared with state-owned firms. Further, these effects are less prominent for politically connected firms that are afforded informal protection of property rights. Our findings shed new light on the property rights regime as a critical determinant of firms’ horizontal and vertical scope.

We provide the first systematic analysis of the stock return lead-lag effect among firms connected through shared analyst coverage in China’s A-share markets. We measure the shared analysts-weighted average returns of connected firms (CF) and show that CF return is a significant positive predictor of future returns of the focal firms in the following one to 12 months. The CF-based long-short portfolio earns an abnormal return of 10% to 12% per year. The effect is robust to controls for the industry and geographic momentum effects. Further evidence shows that the CF momentum spillover effect is stronger when the focal firm shares more analysts with connected firms, is covered by more non-star analysts or analysts with lower levels of education, or is held by more stress-resistant institutional investors. Our findings contribute to the cross-asset momentum literature by documenting a new, strong, and long-lasting momentum spillover effect in the Chinese stock markets.

We use China's recent anti-corruption campaign as a natural experiment to examine the (market expected) equilibrium consequences of (anti-)corruption. We argue that the announcement of inspections of provincial governments by the Central Commission for Discipline Inspection (CCDI) on May 17, 2013 represents a significant departure of past norms of anti-corruption campaigns, and thus serves a rare empirical opportunity to examine the equilibrium effects of anti-corruption campaigns for firms. We first present a conceptual framework to illustrate the channels through which anti-corruption actions can influence firms. Using an event study approach and May 17, 2013 as the event date, we find that, overall, the stock market responded positively to the announcement of strong anti-corruption actions. The announcement returns are significantly lower for luxury-goods producers, and SOES, large firms, or politically connected firms earn lower returns than private, small, or non-connected firms. We also find that existing local institutions play a crucial role in determining the announcement returns across firms. Moreover, a long-term difference-in-differences analysis shows that higher returns during the event window are associated with more subsequent entries of new firms and faster expansions of existing firms. Finally, we also provide direct evidence consistent with the endogenous grits effect.

We analyze the effects on Chinese firms of the "China Connect" equity market liberalization. Because China is a capital abundant country, unlike typical emerging markets in the literature, the benefits and costs of liberalization are logically different. Nonetheless, the liberalization brought benefits: lower funding costs, higher stock prices, and more investment for connected firms compared to unconnected firms, despite a common negative effect on all firms from capital outflows. These benefits come from a new channel: reducing domestic credit misallocation between private- and state-owned enterprises. We also document costs: connected firms became more sensitive to external shocks than unconnected firms.

We investigate how a firm’s political connections may affect its corporate policies. We propose and test the hypothesis that firms’ political connections enhance investors’ endorsement of managerial decisions, which elevates firm investment and encourages equity issuance and less cash payout. Using a sample of non-state owned Chinese firms, we find strong evidence in support of this hypothesis. Specifically, politically connected firms are less likely to pay dividends and pay less if they pay. The dividend announcement returns are significantly lower in connected firms than in otherwise similar but unconnected firms. Investors prefer firm investments to cash payouts by politically connected firms with high growth opportunities, and tend to value these firms’ investment decisions significantly higher. Finally, connected firms are also more able to tap public equity market for external funds. Our evidence is more consistent with political connections being an investor endorsement device rather than the expropriation device as suggested in the prior literature.

This paper examines the value of political connections in the Chinese IPO market. We find a positive relationship between CEO/chairman’s political connections and the probability of IPO approval of entrepreneurial firms. We further identify that minority shareholders value those connections and give a market premium to the connected firms after the firms go public. We provide evidence that connected independent directors and PE/VC investors bring important networks which facilitate firms’ access to the IPO market, albeit the former complements and the latter substitutes the CEO/chairman’s connections. We argue that in emerging markets where government intervention is still prevalent, the value of political connections does exist and entrepreneurial firms usually build political connections through different ways in order to facilitate their access the IPO market and obtain a higher market premium.

The conflict of interest between controlling and minority shareholders is an important issue in firms with concentrated ownership. We document that expropriation behavior by controlling shareholders through tunneling or self-dealing is far more severe in politically connected firms than in nonpolitically connected firms. This severity results more from the formers’ lower concern with capital market punishment than from the possibility that such firms tend to establish political connections for protection. Consistent with the view that a firm’s financing condition influences its corporate governance, we show that such severe expropriation occurs only in firms whose political connection helps them secure bank loan access.

This study examines the relation between political connections and investment efficiency in China. For listed state-owned enterprises (SOEs), we find that the sensitivity of investment expenditure to investment opportunities is significantly weaker for those with than without political connections. Politically connected SOEs over-invest significantly more than non-connected SOEs. This negative impact of political connections is primarily observed in SOEs controlled by local governments and/or in SOEs without sufficient investment opportunities. However, for private enterprises, investment expenditure is significantly more sensitive to investment opportunities and over-investment is significantly less in politically connected firms than in those without such connections. We further show that over-investment reduces firm value across the board for both SOEs and private enterprises. Taken together, our findings suggest that political connections distort investment behavior, reduce investment efficiency, and damage firm value in listed SOEs in China, but for listed private enterprises, political connections improve investment efficiency, reduce over-investment, and consequently enhance firm value.